This report has cleared the Treasury Inspector General For
Tax Administration disclosure review process and information determined to be
restricted from public release has been redacted from this document.

May 20, 2004

MEMORANDUM
FOR DAVID A. GRANT

DIRECTOR
OF PROCUREMENT

INTERNAL
REVENUE SERVICE

FROM:Daniel R. Devlin /s/ Daniel R. Devlin

Assistant Inspector General
for Audit (Headquarters Operations and

Exempt Organizations
Programs)

SUBJECT:Report on Audit of Labor Internal
Controls (Audit#20041C0226)

The
Defense Contract Audit Agency (DCAA) had examined the contractor’s labor
accounting system as of January 29, 2004. The purpose of the examination was to assure that the contractor’s
system of labor controls is adequate to provide labor costs that are reasonable
and compliant with applicable laws, regulations, and contract terms.The DCAA examined only the labor accounting
system and, accordingly, expresses no opinion on the contractor’s system of
internal controls taken as a whole.

The
DCAA opined that the contractor’s labor accounting system is inadequate.The examination noted significant
deficiencies in the design or operation of the internal control structure.According to the DCAA, these deficiencies
could adversely affect the organization’s ability to record, process,
summarize, and report labor costs in a manner that is consistent with
applicable Federal Government contract laws and regulations.These conditions include the following:

·The contractor lacks adequate written policies and
procedures which provide for monitoring of its labor system, including regular
compliance audits that ensure the timely and accurate recording, distribution,
and payment of labor costs.

·The contractor’s written policies and procedures do not
adequately address the control and issuance of work authorizations.

·The contractor’s DataBasics program, as currently
implemented, permits supervisors to modify employee timesheets and submit them
without employee recertification.

·The contractor’s DataBasics program, as currently designed
and implemented, permits alternative timesheet approvers to approve their own
timesheets, should the primary approver by unavailable.

·The contractor’s timekeeping system, as currently
configured, does not prevent employees who normally charge indirect time from
charging direct time to a project, nor does the system restrict what indirect
accounts an employee who normally charges direct time may charge.

·The contractor lacks adequate written policies and
procedures for overtime.

The
DCAA indicated that, as a result of control risk assessments, its audit effort
will be increased in reviews of incurred labor cost, billing, and contract
pricing.The DCAA also indicated that
the contractor generally agrees to the findings and is taking aggressive action
to correct the deficiencies.

The
information in this report should not be used for purposes other than those
intended without prior consultation with the Treasury Inspector General for Tax
Administration regarding their applicability.

If you have any questions, please
contact me at (202) 622-8500 or John R. Wright, Director, at (202) 927-7077.

Attachment

NOTICE:

The Office of Inspector General for Tax Administration has
no objection to the release of this report, at the discretion of the
contracting officer, to duly authorized representatives of the contractor.

The contractor information contained in this report is
proprietary information.The
restrictions of 18 U.S.C. § 1905 must be followed in
releasing any information to the public.

This report may not be released without the approval of
this office, except to an agency requesting the report for use in negotiating
or administering a contract with the contractor.